"InterMune, Inc. (InterMune) is a biotech company focused on developing and commercializing therapies in pulmonology and hepatology. As of December 31, 2008, the Company’s development programs included pirfenidone for idiopathic pulmonary fibrosis (IPF)."
The news this morning is the FDA is scheduled to meet on March 9, 2010 to discuss the efficacy of the treatment. Here is an excerpt from headlines this morning:
There is an urgent unmet need for approved medicines for patients with IPF, a uniformly fatal disease that affects approximately 100,000 Americans, with more than 30,000 new cases diagnose annually," said Dan Welch, Chairman, CEO and President of InterMune. "Despite the chronic, fatal nature of this disease, which has a higher mortality rate than that of colorectal cancer, breast cancer or prostate cancer, there are currently no approved medicines to treat IPF."
The race to address the decision on this treatment is clearly evident from the fact that the FDA granted InterMune "Priority Review" on Jan 4, 2010. Following the granting of priority review, InterMune successfully completed 5M share secondary offering. On Jan 25, 2010, Oppenheimer reiterated Outperform rating with $25 price target.
Currently, the implied volatility across all months (except Feb) have exploded to near 200. The best way to bet on the long side is through the following unbalanced Butterfly spread:
- Buy to open 10 contracts of April $20 calls
- Sell to open 25 contracts of April $25 calls
- Buy to open 15 contracts of April $30 calls
I am doing the unbalanced butterfly so the net cost is exactly zero, except the mandatory margin requirement. Also, I am doing this butterfly in April because March does not have very many strikes available yet. Currently, March at-the-money straddle is going for $10, so traders expect the stock to move approx 60% on either direction on FDA decision.
If executed for net cost of $0.00, the beauty of this trade is on a bad decision there is nothing to lose if the stock collapses. On good results if the stock shoots up to $25 where Oppenheimer set its price target, the profit potential is nearly 2.5 to 1. The only caveat is the break even on the upside is $28.35 and you don't want the stock to go higher than that. I like the odds.
Good luck!
